Questions
5-4
If you buy a callable bond and interest rates decline, willthe value of your bond rise by as much as it would have risen if the bond hadnot been callable? Explain.
5-5
A sinking fund can be set up in one of two ways. Discuss the advantages of each procedure fromthe viewpoint of both the firm and its bondholders.
Problem
5-6
The real risk-free rate is 3% and inflation is expected tobe 3% for the next two years. A 2-yearTreasury security yields 6.3%. What isthe maturity risk premium for the next 2-year security?
5-12
A 10-year, 12% semiannual coupon bond with a par value of$1,000 may be called in 4 years at a call price of $1,060. The bond sells for $1,100. (assume that the bond has just been issued.)
a. What is the bond’s yield to maturity?
b. What is the bond’s current yield?
c. What is the bond’s capital gain or loss yield?
d. What is the bond’s yield to call?
5-20
Because of a recession, the inflation rate expected for thecoming year is only 3%. However theinflation rate in Year 2 and thereafter is expected to be constant at somelevel above 3%. Assume that thereal-free rate is r*=2%for all maturities and that there are no maturitypremiums. If 3-year Treasury notes yield2 percentage points more than 1-year notes, what inflation rate is expectedafter Year 1?
